Stacking the instruments from senior to junior will naturally create a capital waterfall that’s easy to visualize and apply. This map comes with 6 Asian corporate cases.
A. Capital Stack: From Most Senior to Most Junior
| Seniority | Instrument | Key Features |
|---|---|---|
| 1. Secured Senior Debt | Secured Loans, Secured Bonds | Collateralized, first claims in insolvency |
| 2. Unsecured Senior Debt | Unsecured Bonds, Bank Loans | Fixed payments, contractual claims |
| 3. Subordinated Debt / Mezzanine | Subordinated Bonds, Vendor Loans, Mezzanine Debt | Lower priority, higher yield, sometimes with equity kickers |
| 4. Hybrid Debt-Equity | Convertible Bonds, Exchangeables, CoCos, Perpetual Bonds | Debt with potential conversion or write-down |
| 5. Preferred Equity | Cumulative / Non-cumulative Preferred Shares | Priority dividends, but subordinate to debt |
| 6. Common Equity | Common Shares, Dual-Class Shares | Residual claim, absorbs losses first |
Visual Hierarchy (Top = Most Senior):
| Secured Senior Debt | (Collateralized Loans, Secured Bonds)
|-------------------------|
| Unsecured Senior Debt | (Bonds, Term Loans, FRNs)
|-------------------------|
| Subordinated Debt | (Subordinated Bonds, Mezzanine Loans)
|-------------------------|
| Hybrid Instruments | (Convertibles, Perpetual Bonds, CoCos)
|-------------------------|
| Preferred Equity | (Cumulative/Non-Cumulative Preferreds)
|-------------------------|
| Common Equity | (Ordinary Shares, Dual-Class Stock)
B. 6 Asian Corporate Cases of Capital Arbitrage
These examples illustrate real-world transitions or arbitrages between categories to exploit regulatory gaps, tax advantages, or financial engineering.
1. Huarong Asset Management (China)
Instrument Arbitrage:
Issued USD 3.4 billion perpetual bonds in 2020, classified as debt for investor optics but counted as Tier 1 capital for regulatory purposes.
Why?
- Perps paid 4.25%–4.75% coupons, deferrable but cumulative.
- Treated as debt for offshore investors (to lower cost of capital)
- Treated as equity under Basel rules (to meet capital adequacy ratios)
Capital Stack Impact:
- Shifted from subordinated debt to hybrid AT1, delaying dilution.
- In practice: disguised equity to look like debt.
2. Noble Group (Hong Kong / Singapore)
Instrument Arbitrage:
- Issued convertible bonds and perpetual notes between 2014–2017.
- Perpetual notes (~$1.1bn) treated as equity in financial statements to reduce reported leverage.
Why?
- Perps had 8.75%–9.75% coupons but no maturity.
- Helped avoid covenant breaches while hiding rising risk.
- Converted some debt into equity-like obligations without actual shareholder dilution (yet).
Capital Stack Impact:
- Shift from senior debt to hybrids to delay restructuring triggers.
- Eventually defaulted, exposing capital stack fragility.
3. Vedanta Resources (India)
Instrument Arbitrage:
- Issued $1.4bn intercompany loans from subsidiaries disguised as debt to upstream cash from cash-rich units (Hindustan Zinc).
Why?
- Avoid Indian dividend distribution tax (DDT pre-2020 reform).
- Debt treated as intercompany loan, not equity dividend.
- Interest payments reduced tax; dividends would not.
Capital Stack Impact:
- Functionally equity remittances, structured as debt for tax efficiency.
- Arbitraged between shareholder returns and debt instruments.
4. Lippo Karawaci (Indonesia)
Instrument Arbitrage:
- Issued USD 95m perpetual bonds in 2019 to fund buyback of debt.
- Treated as equity in accounting, but marketed to bond investors as debt with 8.75% coupon.
Why?
- Reduced headline leverage (debt/equity ratio improved).
- Maintained control (no shareholder dilution).
- Used “perps” to refinance term loans and push maturities.
Capital Stack Impact:
- Shift from senior debt to hybrid, improving optics without reducing real risk.
5. TSMC (Taiwan Semiconductor)
Instrument Arbitrage:
- Issued NT$60bn (USD 2bn) unsecured straight bonds in 2020 at 0.43% coupon (5-year) and 0.63% (7-year).
Why?
- Despite large cash reserves, used cheap debt to avoid equity issuance or dividend adjustments.
- Arbitraged between debt’s low cost of capital and maintaining capital structure stability.
- Tax deductibility vs. zero dilution.
Capital Stack Impact:
- Chose senior debt over retained earnings or equity to optimize WACC.
6. Li Ka-Shing’s CK Hutchison Holdings (Hong Kong / Singapore)
Instrument Arbitrage:
- Used equity derivatives (Total Return Swaps + Forward Contracts) to build or unwind positions without triggering disclosure thresholds.
Why?
- Avoid public share price impact.
- Maintain optionality between synthetic exposure vs real ownership.
- In some cases, synthetic equity acts like debt (margin calls, cash settlement risk), but economically tracks equity.
Capital Stack Impact:
- Hybrid synthetic positions blurred ownership vs exposure.
- Arbitrage of capital markets disclosure vs real control.
C. Patterns & Lessons
| Tactic | Purpose |
|---|---|
| Perpetual Bonds | Disguise equity as debt for optics/regulatory capital |
| Convertibles/Hybrids | Delay dilution, manage capital stack under stress |
| Intercompany Loans | Tax arbitrage between dividends and debt |
| Synthetic Equity | Control vs exposure management (ownership without reporting) |
| Low-cost Senior Debt | Preserve capital efficiency even when cash-rich |
| Regulatory Arbitrage | Capital structure engineering for Basel/Tax advantages |
